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                              CAUTIONARY STATEMENT
 
    ARCADIA FINANCIAL LTD. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE
COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT"). THIS
CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN IDENTIFIED
FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE "SAFE
HARBOR" PROVISIONS OF THE ACT AND IS INTENDED TO BE A READILY AVAILABLE WRITTEN
DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE RESULTS TO DIFFER MATERIALLY
FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS ARE IN ADDITION TO ANY OTHER
CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE MADE OR REFERRED TO IN
CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
 
    THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
 
LIQUIDITY AND ACCESS TO CAPITAL RESOURCES
 
    NEGATIVE OPERATING CASH FLOWS.  The Company's business requires substantial
cash to support the payment of dealer participations, the funding of spread
accounts in connection with securitizations, the purchase of loans pending
securitization, the financing of repossessed inventory and other cash
requirements, in addition to debt service. To the extent that increases in the
volume of loan purchases and securitizations provide income, a substantial
portion of such income is received by the Company in cash over the life of the
loans. The Company has operated on a negative operating cash flow basis and
expects to continue to do so in the near future. The Company has historically
funded these negative operating cash flows principally through borrowings from
financial institutions, sales of equity securities and sales of senior and
subordinated notes. The Company may require additional capital in the future to
fund continued negative cash flows, although there can be no assurance that the
Company will have access to the capital markets in the future or that financing
will be available to satisfy the Company's operating and debt service
requirements or to fund its future growth. Factors which could affect the
Company's access to the capital markets, or the costs of such capital, include
changes in interest rates, general economic conditions, the perception in the
capital markets of the Company's business, results of operations, leverage,
financial condition and business prospects, and the performance of the Company's
securitization trusts. In addition, covenants with respect to the Company's debt
securities and credit facilities may significantly restrict the Company's
ability to incur additional indebtedness and to issue new classes of preferred
stock.
 
    POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS.  The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected if the
Company does not have access to the capital markets for the sale of additional
debt or equity through public offerings or private placements on terms
reasonably satisfactory to the Company. See "--Liquidity and Access to Capital
Resources--Negative Operating Cash Flows" above.
 
    DEPENDENCE ON WAREHOUSE FINANCING.  The Company depends on warehouse
facilities with financial institutions or institutional lenders to finance its
purchase of loans on a short-term basis pending securitization. At June 30,
1998, the Company had $875.0 million of warehouse facilities through various
financial institutions and institutional lenders, of which $821.0 million was
available. One of the facilities, with a capacity of $175.0 million, was
terminated by the Company in July 1998. The remaining facilities expire in
October 1998 and July 1999, subject to renewal or extension at the lenders'
option. There can be no assurance that such financing will continue to be
available on terms reasonably satisfactory to the Company. The inability of the
Company to arrange additional warehouse facilities or to extend or replace
existing facilities when they expire would have a material adverse effect on the
Company's business, financial condition and results of operations and on the
Company's outstanding securities.
 
    DEPENDENCE ON SECURITIZATION.  The Company has relied upon its ability to
aggregate and sell loans as asset-backed securities in the secondary market to
generate cash proceeds for repayment of warehouse
 
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facilities and to purchase new loans from dealers. Since inception, the Company
has securitized approximately $9.9 billion of automobile loans. At June 30,
1998, approximately $5.1 billion of these loans were outstanding. Accordingly,
adverse changes in the Company's asset-backed securities program or in the
asset-backed securities market for automobile receivables generally could
materially adversely affect the Company's ability to purchase and resell loans
on a timely basis and upon terms reasonably satisfactory to the Company. The
Company endeavors to effect public securitizations of its loans on at least a
quarterly basis. However, market and other considerations, including the
conformity of loans to insurance company and rating agency requirements, could
affect the timing of such transactions. Any delay in the sale of loans beyond a
quarter-end would eliminate the related gain on sale in the given quarter and
adversely affect the Company's reported earnings for such quarter. All of the
Company's securitizations since March 1993 and one of the Company's warehouse
facilities have utilized credit enhancement in the form of financial guaranty
insurance policies issued by FSA to achieve "AAA/Aaa" ratings with respect to
the asset-backed securities. The Company believes that financial guaranty
insurance policies reduce the costs of the securitizations and such warehouse
facility relative to alternative forms of credit enhancements available to the
Company. FSA is not required to insure Company-sponsored securitizations and
there can be no assurance that it will continue to do so or that future
Company-sponsored securitizations will be similarly rated.
 
LOAN PERFORMANCE RISKS
 
    POTENTIAL NEGATIVE EFFECTS ON FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY.  The Company's business, financial condition, results of operations
and liquidity depend, to a material extent, on the performance of loans
purchased and sold by the Company. When such loans are sold in securitizations,
the Company recognizes a gain on sale. Finance income receivable, the Company's
principal asset, has been calculated using assumptions concerning future
default, prepayment and net loss rates on securitized loans that are based on
the Company's historical experience, externally-generated industry information,
market conditions and expectations of future performance and present value
discount rates that the Company believes would be requested by an unrelated
purchaser of a similar stream of estimated cash flows. Management believes that
the Company's estimates of excess cash flow were reasonable at the time each
gain on sale of loans and related finance income receivable was recorded.
However, the actual rates of default and/or prepayment and/or net loss on such
loans may exceed those estimated for future valuation of the Company's finance
income receivable and consequently may adversely affect anticipated future
excess cash flow. The Company periodically reviews its default, prepayment and
net loss assumptions in relation to current performance of the loans and market
conditions, and, if necessary, adjusts the balance of finance income receivable.
The Company has made two significant adjustments to its finance income
receivable, one at June 30, 1998 and one at March 31, 1997, both after
completing such reviews. These adjustments resulted in reductions to finance
income receivable of $114.5 million and $98.0 million, respectively. The June
1998 adjustment was due to a change in accounting estimate related to expected
charge off, recovery and prepayment rates. The March 1997 adjustment was the
result of revisions to management's estimate of future recovery rates on the
sale of repossessed inventory. The Company's business, financial condition,
results of operations and liquidity could be materially adversely affected by
additional adjustments in the future. No assurance can be given that loan losses
and prepayments will not exceed the Company's estimates or that finance income
receivable could be sold at its stated value on the balance sheet, if at all.
 
    POSSIBLE RESTRICTIONS ON CASH FLOW FROM SECURITIZATIONS.  The Company's
future liquidity and financial condition, and its ability to finance the growth
of its business and to repay or refinance its indebtedness, will depend to a
material extent on distributions of excess cash flow from securitization trusts.
The Company's agreements with FSA provide that the Company must maintain in a
spread account for each insured securitization trust specified levels of excess
cash during the life of the trust. These spread accounts are initially funded
out of initial deposits and/or cash flows from the related trust. Thereafter,
during each month, excess cash flow due to Arcadia Receivables Finance Corp.
("ARFC") from all insured securitization trusts is first used to replenish any
spread account deficiencies and is then distributed to ARFC and from ARFC to the
Company. The timing and amount of distributions of excess cash from
securitization trusts
 
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varies based on a number of factors, including but not limited to, loan
delinquencies, defaults and net losses, the rate of turnover of repossession
inventory and recovery rates, the ages of loans in the portfolio, prepayment
experience and required spread account levels. A deterioration of the Company's
loan delinquencies, cumulative defaults or net losses, a build-up in
repossession inventory, the anticipated increase in the proportion of
repossession inventory sold in the wholesale auction markets resulting from the
Company's decision to discontinue its retail resale of repossession inventory,
or an increase in the proportion of loans in their first and second years, would
reduce excess cash available to the Company. At June 30, 1998, the Company had
an aggregate of $266.7 million of restricted cash in spread accounts. There can
be no assurance that in the future the Company will not experience an
interruption of excess cash flow from ARFC, which could adversely affect the
Company's ability to pay its obligations.
 
    Each insured securitization trust has certain portfolio performance tests
relating to levels of delinquency, defaults and net losses on the loans in such
trust based in part on the relative percentage of Premier and Classic loans.
Portfolio performance tests require that the loan portfolio of each insured
securitization trust (i) have an average delinquency ratio not equal to or in
excess of a specified percentage, (ii) have a cumulative default rate not equal
to or in excess of specified percentages which vary based on the aging of the
loan portfolio, and (iii) have a cumulative net loss rate not equal to or in
excess of specified percentages which vary based on the aging of the loan
portfolio. If any of these tests are exceeded (a "violation"), the amount
required to be retained in the spread account related to such securitization
trust will be increased to an amount generally equal to the greater of 10% of
the outstanding balance of loans or 1% of the original balance of loans held by
the securitization trust. As a consequence, a violation generally will decrease
excess cash flow available from such securitization trust until loan portfolio
performance has returned to the required limits for a specified period,
generally three to five months, unless waived by FSA. FSA and the Company have
an arrangement under which, if any insured securitization trust exceeds the
specified portfolio performance tests, ARFC may, in lieu of retaining the excess
cash from that securitization trust in the related spread account, pledge an
equivalent amount of cash, which has the effect of preventing the violation of
the portfolio performance test. Although certain trusts, primarily those that
contained loans originated in 1995, have exceeded portfolio performance tests
and are still in excess of such tests, this arrangement with FSA has prevented a
violation, although it has reduced the amount of cash that would otherwise have
been available to the Company for use if the Company had sought and received a
waiver of such violation from FSA. A deterioration of the Company's
delinquencies, cumulative defaults or net losses would result in one or more
additional existing securitization trusts exceeding one or more of these tests
in the absence of changes to the trigger levels. There can be no assurance that,
in such event, waivers will be available from FSA permitting payments to ARFC.
 
    Upon the occurrence of certain events with respect to any series of 
asset-backed securities insured by FSA, including the failure to meet loan 
portfolio performance tests of the nature described above but at 
significantly higher levels, or upon a breach of the collateral coverage 
requirements of the FSA-insured warehouse facility (an "Insurance Agreement 
Event of Default"), the Company will be in default under its insurance 
agreement with FSA. Upon an Insurance Agreement Event of Default, unless 
waived by FSA, FSA may suspend distributions of cash flow from the related 
securitization trust and all other FSA-insured trusts (including the 
FSA-insured warehouse facility) until the asset-backed securities have been 
redeemed, capture excess cash flow from performing trusts, increase its 
premiums and replace the Company as servicer with respect to all FSA-insured 
trusts. There can be no assurance that a further deterioration of the 
Company's loan delinquencies, gross charge-offs and net losses would not 
result in an Insurance Agreement Event of Default, which could adversely 
affect the Company's ability to satisfy its obligations. Certain of the 
Company's securitization trusts have exceeded such insurance agreement 
thresholds and continue to exceed such thresholds and the Company has 
obtained waivers from FSA to permit distributions of cash to ARFC. There can 
be no assurance that in the future, if such thresholds are exceeded, waivers 
will be available.
 
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    In addition, the spread account for each securitization is
cross-collateralized to the spread accounts established in connection with the
Company's other securitization trusts (including the FSA-insured warehouse
facility) such that excess cash flow from a performing securitization trust may
be used to support negative cash flow from, or to replenish a deficient spread
account in connection with, a nonperforming securitization trust, thereby
further restricting excess cash flow available to ARFC. If excess cash flow from
all insured securitization trusts is not sufficient to replenish all such spread
accounts, no cash flow would be available to the Company from ARFC for that
month. Excess cash flow has been interrupted in the past, and there can be no
assurance that in the future the Company will not experience an interruption of
excess cash flow from ARFC which could adversely affect the Company's ability to
pay its obligations, including the Notes offered hereby. FSA also has a
collateral security interest in the stock of ARFC. If FSA were to foreclose on
such security interest following an event of default under an insurance
agreement with respect to a securitization trust (including the FSA-insured
warehouse facility), FSA could preclude payment of dividends by ARFC to the
Company, thereby eliminating the Company's right to receive distributions of
excess cash flow from all the FSA-insured securitization trusts. The Company's
right to service the loans sold in securitizations insured by FSA is also
generally subject to the discretion of FSA. Accordingly, there can be no
assurance that the Company will continue as servicer for such loans and receive
related servicing fees.
 
    Any increase in limitations on cash flow available to the Company from ARFC
(including any increase in the amount of cash pledged under the arrangement with
FSA), inability to obtain any necessary waivers from FSA or termination of
servicing arrangements could materially adversely affect the Company's cash flow
and liquidity, and, ultimately, its business, financial condition and results of
operations and its outstanding securities.
 
    IMPACT OF PORTFOLIO GROWTH AND PRODUCT MIX.  Historically, the statistical
incidence of delinquencies and defaults in connection with automobile loans
tends to vary over the age of the loan. For example, statistically, loans that
are between six and fourteen months old have had a higher likelihood of being
delinquent or defaulting than loans with similar credit characteristics that are
three months old. Accordingly, to the extent that the Company's historical
portfolio growth has resulted in a servicing portfolio containing
disproportionately more loans originated within the prior six months, the
current and historical delinquency and default rates of loans in the servicing
portfolio may understate future delinquency and default rates.
 
    In addition, to the extent the Company offers new loan products which
involve different underwriting policies, the delinquency and default rates of
the Company's servicing portfolio may change. The Company has instituted a
tiered pricing system and has consistently increased the amount of loans
purchased under its Classic program, which involves borrowers who do not meet
all of the underwriting standards in the Company's Premier program and are
charged rates of interest higher than those under the Company's Premier program.
The Company increased its purchase of loans under the Classic program from 17%
of the principal amount of loans purchased in 1995 to 36% in 1996, 55% in 1997
and 71% in the first six months of 1998. As a result of the increases in Classic
loans as a proportion of the Company's portfolio, there has been an increase in
the rates of, and reserves for, delinquencies, repossessions and losses
historically reported by the Company. The expansion of the Classic loan program
and seasoning of the Company's existing servicing portfolio will likely continue
to cause the Company's loan performance statistics to show higher delinquencies,
gross charge-offs and net losses when compared with historical performance even
if such loan performance statistics are consistent with the Company's reserves
for loan losses.
 
    To estimate future delinquency, repossession and loss experience on its
loans, the Company uses a combination of factors, including actual Company loan
performance experience and industry experience on loans with similar credit
characteristics. During the second quarter of 1998, the Company implemented
refinements to its method for estimating future delinquency, repossession and
loss experience, which resulted in a significant downward adjustment to finance
income receivable at June 30, 1998. See "--Loan Performance Risks--Potential
Negative Effects on Financial Condition, Results of Operations and Liquidity"
above. However, there can be no assurance that its loans will perform under
varying economic conditions in the manner currently estimated by the Company.
Any increase in delinquency, repossession and loss
 
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rates related to its loans above the rates estimated by the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations, as well as its liquidity. In addition, certain of the
Company's loan products which produce higher delinquency, repossession and loss
rates than expected may continue to have an impact on the Company's overall loan
performance, even after being discontinued or modified, until such loans are
repaid or have defaulted. In 1996, the Company discontinued a Classic loan
product directed at first-time credits and modified a Classic program for
financing the sale of its repossessed inventory in retail markets, each of which
had experienced higher than expected delinquency, repossession and loss rates,
but the loans generated under this program have continued to impact the
performance of those securitization pools containing them.
 
    EXTENSIONS AND AMENDMENTS.  Like others in the industry, the Company gives
certain obligors extensions or amendments to loan terms in certain
circumstances, including when the Company believes such obligors will thereby be
more likely to repay their loans, and losses on such loans can be reduced. Loans
that have been extended or amended generally present substantially higher
default risks than loans that have neither of these characteristics. Primarily
as a result of the expansion of the Classic program (which involves higher
credit risks than the Premier program), the portion of the Company's servicing
portfolio which exhibits one or both of these characteristics has increased.
Extensions and amendments (in the aggregate) averaged approximately 3.3% of the
servicing portfolio per month in 1997, 2.7% per month in 1996 and 1.9% per month
in 1995, and with seasonal peaks occurring during the Christmas holiday season.
Extensions and amendments (in the aggregate) averaged approximately 3.0% per
month for the first six months of 1998, compared to 3.5% per month for the first
six months of 1997. The Company believes that one reason for the increase in
extensions and amendments as a percentage of the servicing portfolio during 1997
was the slower rate of growth in the size of the Company's portfolio, which
resulted in a higher percentage of loans of the age that are more likely to be
extended or amended. Any continued slowing of growth could contribute to a
further increase in such statistics. The Company considers these characteristics
when establishing its loss reserves. In certain circumstances, loans that have
been extended or amended have the effect of removing the related loan from
delinquent status.
 
    POTENTIAL NEGATIVE IMPACT OF COVENANTS UNDER FINANCING
AGREEMENTS.  Increases in loan delinquency and loss rates with respect to any
securitization trust may result in the trust's portfolio exceeding the various
pool performance levels established by FSA, thereby restricting or cutting off
cash distributions from the securitization trust spread accounts to ARFC (and
thus to the Company). See "--Loan Performance Risks-- Possible Restrictions On
Cash Flow from Securitizations" above. In addition, such increases may cause the
Company to exceed certain pool performance tests established in other agreements
governing its indebtedness. If at the end of any month the Portfolio Net Loss
Ratio (as defined) exceeds 6.0%, the Delinquency Ratio (as defined) exceeds
4.5%, the Net Pledged Receivable Loss Ratio for Pledged Receivables (as defined)
exceeds 1.0%, or the Average Excess Spread Percentage (as defined) is less than
5.5% (which level is subject to increase if the Portfolio Net Loss Ratio is
higher than 4.0%), an event of default will occur under one of the Company's
outstanding warehouse facilities. The delinquency level is calculated as a
percentage of outstanding principal balance of all automobile loans owned or
securitized by the Company as to which a payment is more than thirty days past
due. Upon the occurrence of an event of default under such warehouse facility,
the lending banks under such facility would have no further obligation to extend
additional credit. Furthermore, any such event of default or acceleration may
trigger cross-defaults under other outstanding indebtedness of the Company and
may result in the acceleration of amounts due thereunder. The increase in
Classic loans, among other things, has increased the risk that the Company may
trigger its Portfolio Net Loss Ratio covenants in the future.
 
    RESALE AND FINANCING OF REPOSSESSIONS  In addition to wholesale distribution
channels, the Company has regularly disposed of repossessed vehicles through
retail markets, primarily retail used car consignment lots. In July 1998 the
Company announced that it has decided to discontinue its retail disposition of
repossessed vehicles and anticipates having eliminated this program by the end
of 1998. The Company's adjustments to finance income receivable at June 30, 1998
and March 31, 1997 both included amounts
 
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related to a reduction in the estimated recovery rates on then current
repossessed inventory and anticipated future inventory arising from then
existing securitization transactions. During the first six months of 1998,
approximately 26% of repossessed vehicles sold were liquidated through retail
markets, compared with 55% in the first six months of 1997 and 46% in all of
1997.
 
    The Company's repossession inventory has generally increased as a percentage
of its servicing portfolio due in part to the period repossessions have been
held pending retail resale, which is typically a longer period of time than for
wholesale auctions, and also to the increase in the rate of loan defaults and
changes in the number and type of dealers used for retail repossession sales. At
June 30, 1998, the Company had $28.9 million of repossessed inventory, compared
to $55.3 million at December 31 1997, $64.9 million at December 31, 1996, and
$17.7 million at December 31, 1995. The decrease in inventory at June 30, 1998
was primarily the result of the Company's increased use of wholesale
distribution channels during 1998 and the resulting increase in inventory
turnover. There can be no assurance that any further softening of used car
markets or other factors will not cause the Company's recovery rate on
repossessed vehicles to decline further, which could require additional
adjustments to estimated recovery rates and finance income receivable.
 
    In connection with its retail dispositions of repossessions, the Company has
offered to finance the purchase of the resold automobile by a new buyer.
Delinquency, gross charge-off and net loss rates associated with loans on
repossessed automobiles have historically been substantially in excess of the
same statistics associated with the Company's remaining servicing portfolio.
 
    POTENTIAL NEGATIVE IMPACT OF INCREASE IN PERSONAL BANKRUPTCIES.  Recent
media reports have suggested an increase in the number of personal bankruptcy
filings and during most of 1997 and the first half of 1998 the Company
experienced a slight increase in the proportion of its servicing portfolio
representing loans to borrowers who have filed for bankruptcy protection. A
continuation or increase in such trend could contribute to greater default and
net loss rates than the Company has historically experienced.

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ECONOMIC CONDITIONS
 
    MARKET CONDITIONS.  Periods of economic slowdown or recession, whether
general, regional or industry-related, may increase the risk of default on
automobile loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for automobiles, resulting in reduced
demand for automobile loans and declining values of automobiles securing
outstanding loans, thereby weakening collateral coverage and increasing the
possibility of losses in the event of default. The increased proportion of loans
generated under the Company's Classic program has increased the Company's
sensitivity to changes in economic conditions. In addition, recent reports of
increases in consumer bankruptcy filings and default rates on consumer credit
during a period of economic growth indicate that the impact of consumer behavior
on default rates is not limited to periods of economic slowdown or recession.
 
    Moreover, significant increases in the inventory of used automobiles during
recessionary economies may depress the prices at which repossessed automobiles
may be sold or delay the timing of such sales. A continuation of the recent
softening of the used car market as the result of factors including the recent
start-up of superstore competition or forecasted levels of used lease vehicles
that will be available in the market could have a similar effect on prices for
and timing of sales of repossession inventory. There can be no assurance that
the used automobile markets will be adequate for the sale of the Company's
repossessed automobiles and any material deterioration of such markets could
increase the Company's loan losses or reduce recoveries from the sale of
repossession inventory. Any such event might have an adverse effect on loan loss
levels, and on the Company's financial condition, results of operations and
liquidity. In addition, the Company has channeled a portion of its repossession
inventory through retail resale markets instead of wholesale markets, including
the financing of such retail sales, which has had the effect of reducing the
Company's loan losses while increasing repossession inventory and delaying cash
flow recovered from inventory turnover. In July 1998 the Company announced that
it has decided to discontinue its retail disposition of repossessed vehicles and
anticipates having eliminated this program by the end of 1998.
 
    INTEREST RATES.  The Company's profitability may be directly affected by the
level of and fluctuations in interest rates, which affect the Company's gross
interest rate spread. The Company monitors the interest rate environment and
employs prefunding or other hedging strategies designed to mitigate the impact
of changes in interest rates on its gross interest rate spread. However, there
can be no assurance that the profitability of the Company would not be adversely
affected during any period of changes in interest rates.
 
    LABOR MARKET CONDITIONS.  The Company's ability to manage portfolio
delinquency, default and loss rates is dependent on its ability to attract and
retain qualified servicing and collection personnel. In recent months, low
unemployment rates driven by economic growth and the continued expansion of the
consumer credit markets have contributed to an increase in employee turnover
rate, especially among the Company's
 
                                       7
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collection personnel. Continued high turnover relative to historical levels, or
an inability to attract and retain replacement personnel, could have an adverse
effect on the Company's portfolio delinquency, default and net loss rates and,
ultimately, its financial condition, results of operations and liquidity.
 
LITIGATION
 
    On March 4, 1997 a shareholder commenced an action against the Company and
certain named directors and officers of the Company entitled Taran v. Olympic
Financial Ltd. et al. in the United States District Court for the District of
Minnesota. Four similar lawsuits, three of them in the United States District
Court for the District of Minnesota (Frank Dibella, on behalf of himself and all
others similarly situated vs. Olympic Financial Ltd. et al., Michael Diemer vs.
Olympic Financial Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et
al.) and one in the United States District Court for the Eastern District of New
York (North River Trading, LLC, and Allan Farkas, and All Others Similarly
Situated vs. Olympic Financial Ltd. et al.) were filed after that time. These
suits have been consolidated in one suit, In re Olympic Financial Ltd.
Securities Litigation, in the United States District Court for the District of
Minnesota. Plaintiffs in the consolidated action allege that during the period
from July 20, 1995 through March 3, 1997 the defendants, in violation of federal
securities laws, engaged in a scheme that had the effect of artificially
inflating, maintaining and otherwise manipulating the value of the Company's
Common Stock by, among other things, making baseless, false and misleading
statements about the current state and future prospects of the Company,
particularly with respect to the Classic program and the refinancing of
repossessed automobiles. Plaintiffs allege that this scheme included making
false and misleading statements and/or concealing material adverse facts. The
consolidated action is in the preliminary stages and the parties have not begun
discovery. The Company has reviewed the complaint in the consolidated action and
believes that the consolidated action is without merit and intends to defend it
vigorously. There can, however, be no assurance that the Company will prevail in
such defense or that any order, judgment, settlement or decree arising out of
this litigation will not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
 
    The nature of the Company's business is such that it is routinely a party or
subject to other items of pending or threatened litigation, including litigation
involving actions against borrowers to collect amounts on loans or to repossess
vehicles and litigation challenging the terms of loans purchased by the Company.
Although the ultimate outcome of certain of these matters cannot be predicted,
management of the Company believes, based upon information currently available
and the advice of counsel, that the resolution of those various matters
currently pending will not result in any material adverse effect on the
Company's financial condition, results of operations or liquidity.
 
MANAGEMENT OF GROWTH
 
    The historical growth of the Company's servicing portfolio and the greater
proportion of Classic loans contained in that portfolio have resulted in
increased demands on the Company's personnel and systems. The Company's ability
to support, manage and control growth is dependent upon, among other things, its
ability to hire, train, supervise and manage its larger workforce. Furthermore,
the Company's ability to manage portfolio delinquency and loss rates is
dependent upon the maintenance of efficient collection and repossession
procedures and adequate staffing therefor. There can be no assurance that the
Company will have trained personnel and systems adequate to support its key
initiatives. Since 1996 the Company has opened four regional collection centers
and taken a number of initiatives to improve its servicing and collection
performance. There can be no assurance that these efforts will be successful.
 
COMPETITION
 
    The business of financing automobiles is highly competitive. Existing and
potential competitors include well-established financial institutions, such as
banks, other automobile finance companies, small loan companies, thrifts,
leasing companies and captive finance companies owned by automobile
manufacturers, such as General Motors Acceptance Corporation, Chrysler Credit
Corp. and Ford Motor Credit Company.
 
                                       8
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Many of these competitors have greater financial, technical and marketing
resources than the Company and from time to time offer special buyer incentives
in the form of below-market interest rates on certain classes of vehicles. Many
of such competitors also have longstanding relationships with automobile dealers
and some of such major competitors provide other forms of financing to
automobile dealers, including dealer floor plan financing and leasing, which are
not provided by the Company. There can be no assurance that the Company will be
able to compete successfully with such competitors.
 
REGULATION
 
    The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii) limit
the interest rates, fees and other charges the Company is allowed to charge;
(iii) limit or prescribe certain other terms of the Company's automobile loan
contracts; (iv) require specific disclosures; and (v) define the Company's
rights to repossess and sell collateral. The Company believes it is in
substantial compliance with all such laws and regulations, and that such laws
and regulations have had no material effect on the Company's ability to operate
its business. Changes in existing laws or regulations, or in the interpretation
thereof, or the promulgation of any additional laws or regulations, could have a
material adverse effect on the Company's business, financial condition and
results of operations and upon its outstanding securities.

UNDESIGNATED SHARES; ANTI-TAKEOVER CONSIDERATIONS

    The authorized and unissued stock of the Company, other than shares reserved
for issuance pursuant to options and warrants, consists of undesignated shares.
The Board of Directors, without any action by the Company's shareholders, is
authorized to designate and issue the undesignated shares in such classes or
series as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividend, liquidation and voting rights.
The Company has adopted a shareholder rights plan to deter a hostile takeover.
Further, certain provisions of the Minnesota Business Corporation Act may
operate to discourage a negotiated acquisition or unsolicited takeover of the
Company. Each or any of the foregoing could have the effect of entrenching the
Company's directors, impeding or deterring an unsolicited tender offer or
takeover proposal regarding the Company and thereby depriving the then current
shareholders of the ability to sell their shares at a premium over the market
price, or otherwise adversely affecting the voting power, dividend, liquidation
and other rights of holders of Common Stock.


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